Concept in economics that relates to the sensitivity towards a change in price.
There are two extremes of elasticity: perfectly elastic and perfectly inelastic.
The demand curve for perfectly inelastic:
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No matter what the
price is, the
quantity remains the same. An example of this is
medical care. You go to the
doctor for a checkup and
he tells you that your
veins are getting plugged up. You can go through the
operation to get them cleaned, but it will be $12,000. You tell him "no thanks, I feel fine now and I see better uses for that money." A few weeks later you have a
heart attack. When you're at the
hospital, your doctor shows up and tells you that now you have to have that
operation, but now it will cost $200,000. Since this is your life that's at stake, you'll pay that
price - because the
demand is perfectly elastic.
At the other extreme, the demand curve for perfectly elastic:
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Q
The price will stay the same no matter the quantity demanded. This typically occurs in a
perfectly competitive market.
The way to determine elasticity is using the Elasticity Formula:
percentage change in quantity demanded
Ed = --------------------------------------------
percentage change in price
If:
Ed > 1 , then elastic
Ed < 1 , then inelastic
Ed = 1 , then unitary
NOTE: Always put equation in
absolute value (the reason is that price and quantity are
inversely related).
There are also elements that help determine elasticity:
1. Number of Substitutes:
few = inelastic
many = elastic
2. Necessity vs. Luxury
necessity = inelastic
luxury = elastic
3. Portion of Income:
large portion = elastic
small portion = inelastic
4. Length of "Time" that the product has been profitable:
short = inelastic
long = elastic